Cost is the monetary valuation of effort, material, resources, time consumed, risk and opportunity forgone in production or delivery of a good or service. It is simply put as the amount that has to be paid or given up for something to be acquired. Project Cost Management is the process of estimating, budgeting and controlling costs throughout the project lifecycle, to keep expenditures within the approved budget.

Project Cost Management is important because when you are using project cost management, it sets a baseline for project costs and helps in predicting the expenses and revenue of the business so that one can avoid loss and over budgeting. Whenever we are implementing projects, one of our main objectives is that we have to complete the project within the estimated cost. Completing the project within the estimated cost is one of the success criteria along with the project delivery on the requirements and scope, its execution quality is of a high standard, its completion within schedule.

Project Cost Management involves different cost accounting methods that have the goal of improving business cost-efficiency, by reducing costs or at least having measures in place to restrict the growth. Before any project is taken up, it is very appropriate to define the objectives to avoid any kind of cost overruns. They also help in keeping away over, or underestimation of costs. A well-defined project helps in facilitating appropriate management of the costs, making the project a profitable one for the undertaker.

Project Cost Management helps in controlling the project-specific cost, in turn also the overall business cost. One can predict the future expenses, and costs and accordingly work towards the expected revenues. It helps in taking those actions that are necessary to assure that the resources and the business operations aim at attaining the chalked objectives and goals. It helps in analyzing the long term trends of the business. The actual cost incurred can be compared to the budget to see if any component of the business is spending more than expected.

Cost management is indeed one of the essential requisites for the success of any project or business for that matter. When one knows the scope for the cost that the business can bear, it becomes much easier to set the goals and accordingly work towards them. There are much more reasons why Project Cost Management is important and here are some important ones-

1. Project Resource Planning.

Whenever we are implementing projects, we have to identify the resources required to accomplish a project. By resource planning in project cost management, we determine the resources that are needed such as people, equipment and materials. Resources can also be time, human resources, hardware resources, software resources. It also determines what quantity of each should be used. Past information regarding what types of resources were used for similar work on previous projects should be considered. Knowledge of what resources are potentially available is necessary which can be estimated through resource planning in project cost management. Expert judgement from any group or individual with specialised knowledge or training such as consultants are often required to access the inputs of the process. We can identify alternatives through brainstorming or lateral thinking. Project Management software also helps organise resource pools.

Proper resource planning in project cost management ensures that people are not overloaded with work. Their time is spent well and your budget is allocated as intelligently as possible. It helps you answer questions like-

  1. How will the existing projects be effective by adding a new project?
  2. How many additional resources are required to complete a new project without affecting the schedule of others?
  3. Are there any highly skilled graphic designers available in two weeks to begin working on our Christmas campaigns?
  4. Is anyone overloaded with too much work?
  5. Is there anyone who doesn’t have enough work?
  • These questions are important to ask because without knowing the answers you could end up with a frustrated and overworked team that would like nothing better than to quit their jobs.Cons of neglecting to plan your resources.When resources are not handled correctly there are a series of unfortunate events that can occur-
    1. You can accidentally overload people with too much work.
    2. Your project budgets can spiral out of control
    3. Your project may suffer many timeline delays.
    4. It could have a domino effect on other projects in a company.

2. Cost Estimation.

One of the reasons why cost management is important is because here we can do cost estimation of the project. We can get to know how much cost will be required to arrange the resources mentioned above. By estimating costs you can develop an approximation of the monetary resources to complete project activities. The key benefit of this process is that it determines the amount of cost required to complete project work.

We need cost estimates because estimates are needed to support decisions, schedule the work from a time estimate perspective and also from the time estimate from the schedule that we have already worked on. It will also determine how long the project will take and also determine how much the project will cost to judge that against the benefits of the project which will tell us whether the project is worth doing or not.

Factors affecting Costs.

Some of the major factors we need to consider while estimating costs are-

  1. During early phases, the greatest risk to budget accuracy is usually that the scope, activity and constraints are fully unknown. When that’s the case, the basis of the estimate supporting the activity cost estimates should make this clear.
  2. Total Cost of Ownership/Life-Cycle.
  • Decisions made within the project impact the product over its entire lifecycle. We need to keep in mind a longer-term view of the product as we consider project costs. This can be difficult since the project manager may be limited to the project boundaries but we have to make efforts to ensure that cost decisions within the project do not have acceptable repercussions to the total cost of ownership of the product, whether the product is for our organisation or external customers.
  1. Cost of Quality.
  • The cost of quality is about making trade-offs between perfection and acceptable levels of quality in a product.
  1. Marketplace Conditions.
  • Market conditions throughout the project will impact resource costs. Though difficult to anticipate, trends need to be factored into costs especially for longer projects or when clear fluctuations are occurring for project resources. Another marketplace condition that factors into costs is what resources are available and at what cost. For example- if the resource is in high demand, the price is likely to be higher. There could also be only a handful of suppliers from which the resource can be purchased.

Cost Estimating Methods.

  1. Expert Judgement.
  • Expert judgement always plays an important part because many interrelated factors influence costs. Expert judgement relies on historical experience to set and adjust estimates.
  1. Analogous Estimating.
  • Analogous estimating uses the costs from similar projects as the basis for the current project. As long as the two activities are similar and occur under similar situations, that can be a fairly reliable technique.
  1. Parametric Estimating.
  • Estimating uses mathematical formulas to derive estimates from. It does not apply to all activities but when in use, it produces the most accurate estimates. For example- If it’s known that a material that costs $10per cubic meter and 100 cubic meters are needed, the estimated cost is $1000.
  1. Bottom-up Estimating.
  • Bottom-up estimating decomposes activities to the lowest level possible for cost estimating purposes and then back up to a summary activity level. Bottom-up estimating can take some time to do well and it requires specific details to be known about the activity. So it’s not generally an available option in the project planning processes.
  1. Three-point Estimates.
  • This helps to remove the uncertainty from estimates by providing an average using pessimistic and optimistic cost estimates and most likely values.
  1. Vendor Bid Analysis.
  • This involves techniques to ensure that the bids that are being represented are accurate, reasonable and acceptable.

3. Cost Budgeting.

One of the reasons why Project Management is important is that it provides cost budgeting. Cost budgeting allocates costs to a certain chunk of the project, such as individual tasks or modules, for a specific period. By cost budgeting, we can aggregate the estimated costs of individual activities or work packages to establish an authorized cost baseline.

The key benefit of performing cost budgeting is that it determines the cost baseline against which project performance can be monitored and controlled. A project budget includes all the funds authorised to execute the project. The cost baseline is the approved version of the time-phased project budget but excludes management reserves.

Project Funding Requirements.

The performing organisation needs to know the financial costs of the project so that it can appropriate money. The entire estimated cost of the budget, including any contingency or management reserves, is that project funding requirement when we are referring to the project’s budget, we are usually talking about project-based costs.

Every organisation will each have different requirements and terminology for the contents and categorisation of the project budget, but a budget is usually classified in the same categories as what was used by the resource breakdown structure at a broad level. The budgetary classifications are generally reserves, labour personnel, professional, contracted or outside services, supplies, materials, equipment, hardware or software, training, travel, licenses, fees, indirect costs.

The performing organisation will also need to know when it can expect project costs to be incurred. So the project is also shown by calendar periods. When broken down into a team effaced budget this can also serve as the project cost performance baseline.

4. Cost Control.

One of the reasons why project cost management is important is that by this process we can monitor the status of the project to update the project costs and manage changes to the cost baseline. The key benefit of this process is that it provides the means to recognise variance from the plan to take corrective action and minimize risk.

Much of the effort of cost control involves analyzing the relationship between the consumption of project funds to the physical work being accomplished for such expenditure. The key to effective cost control is the management of the approved cost baseline and the changes to that baseline.

Cost Control Includes:

  1. Influencing the factors that create change to the authorized cost baseline.
  2. Ensuring that all change requests are acted on promptly.
  3. Managing the actual changes when and as they occur.
  4. Monitoring cost performance to isolate and understand variances from the approved cost baseline.
  5. Monitoring work performance against funds expended.
  6. Preventing unapproved changes from being included in the reported cost/resource usage.
  7. Informing appropriate stakeholders of all approved changes and associated costs.
  8. Bringing expected cost overruns within acceptable limits